Whether or not you incorporate your business,
it will be subject to taxes,
not necessarily limited to:
- Income taxes, including federal, state, and
- Payroll taxes, such as Social Security and
- State and local taxes assessed on businesses
regardless of their income.
- Property taxes, if it owns real estate.
- Sales taxes. While paid by customers, businesses
The profits of unincorporated
frequently are reported on the
Form 1040, Schedule C and similar
state and local income taxes.
people own the business, each
must pay income
tax on his (her) share of the
Corporations, on the other hand,
own tax returns and pay taxes
a different scale of tax rates
face. For a tax perspective,
of incorporating include:
- at lower levels of income, corporations normally
pay more tax than individuals
- dividends are subject to "double taxation."
Corporations cannot deduct dividends from
their income, yet individuals pay tax on
dividends. The owners of an unincorporated
business, on the other hand, pay tax on its
earnings only once.
If incorporating a small business
from the standpoint of managing
(see our discussion of incorporating), but disadvantageous from a tax standpoint,
a hybrid solution is available.
referred to as a Subchapter S
(after a section of the federal
this corporate form available
for small businesses
- The limits on liability provided by corporations.
- Income that "flows through" to
the owners' individual tax returns, as if
the business were unincorporated. Income
thus is taxed only once. Withdrawals of funds
from the business are not double-taxed as
A simplified (from a reporting standpoint)
version of the S Corporation is the LLC.
State and local governments hit
with various nuisance fees and
even charge businesses with taxes
for existing, even if they earn
This may take the form of a minimum
tax, regardless of actual income,
or it may
be a separate levy. These taxes
based on whether the business
In all cases, seek the guidance of a qualified
tax advisor, such as a Certified Public Accountant
or a tax attorney. If you have not already
considered it, you may want to make one of
these professionals a part of your back ofice staff.